Ben Willis: Trump's pro-growth policies create wave of optimism

16 Feb, 2017

January saw the start of the Chinese New Year, marking the Year of the Rooster. Donald Trump bought a few policy chickens home to roost over the month, not least with his immigration ban, which led to some universal protestation. Such politicking certainly influenced markets and currencies, but global equities registered positive returns, with Asian and emerging markets outperforming their developed market counterparts over the month.

Away from the political noise, recent global economic data has been broadly positive. Global manufacturing PMIs have hit levels not seen for nearly three years. This provided optimism that global GDP could be upgraded to 3%, up from a forecast of 2.7%.

Headlines in the UK continue to be dominated by all things Brexit, but we believe that trying to work out what form it will take is fruitless. However, at present, Brexit is not adversely affecting the UK economy as widely predicted, with recent growth forecasts for the year being upgraded from 1.4% to 2%. This could provide some stability for sterling and we are looking towards increasing our exposure to UK mid and small cap equities.

It has been a positive start to the year for regional equity markets. The reflationary outlook continues to drive up demand for higher-risk assets. The pro-growth policies set out by the Trump administration have created a wave of optimism, and with the volatility index at very low levels, we wonder if investors are becoming complacent.

However, it has provided us with the opportunity to increase our exposure to the US and Europe, adding smaller companies exposure in the former and economically sensitive, domestically focused positions in the latter.

Asian and emerging market equities have started the year strong, largely helped by dollar weakness. The biggest risks facing these markets in the short term remain US dollar strength, US Treasury yields and Chinese economic instability. However, we can also add potential trade tariffs as Trump seems adamant on applying his pre-election policy pledges.

Despite these factors, Asian and emerging market equities still look attractive over the longer term. Structural reforms, better corporate governance, greater consumerism and relatively cheap valuations mean we favour the longer-term case for these markets, but only for those prepared to tolerate the risk.

The reflationary outlook has led to a soft start to the year for government bonds, with yields increasing. Inflation numbers have been spiking up, largely driven by oil and commodity prices. Inflation is the enemy of bonds and investors are favouring other areas for real returns.

Our preference for corporate bonds over government bonds remains. However, although we do not invest directly in UK gilts, we are still not convinced the inflationary environment is here to stay just yet or that this is the end of the 30-year bull market in bonds.

The unpredictable politically driven events that are set to unfold throughout the year are not a reason in itself not to invest. We have seen that hiding in cash in 2016 as protection from last year’s shock events would have seen you miss out on double digit returns across most global equity and bond markets.

Indeed, even with some equity indices reaching all-time highs, we believe the year ahead can provide many opportunities for those prepared to ignore short-term noise, focus on valuations and take a longer-term perspective.

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